As if it hadn't already been drummed into shippers' collective heads, the message coming from the National Industrial Transportation League's (NITL) annual meeting in Fort Lauderdale, Fla., this week was more of the same: Years of tight capacity and higher rates lie ahead, with no guarantee of superior service in return.
The story is nothing new: Capacity levels have reached a crisis stage. There isn't sufficient labor to move what is available. Shippers need to brace themselves to pay more, and to pay up repeatedly, perhaps for the rest of the decade. And they will be willing to do so, especially for truck service, according to John G. Larkin, lead transportation analyst for investment firm Stifel. In this environment, "capacity assurance becomes a competitive advantage," Larkin said during a panel discussion on Wednesday at the NITL meeting.
Larkin said he expects truck-rate hikes to be in the mid- to upper-single digits for years to come. These increases will be the cumulative result of an increase in freight demand, a worsening driver shortage, and compliance with ever increasing federal safety regulations. According to Larkin, compliance with safety regulations will remove an additional 5 to 15 percent of capacity from the market as small to mid-size carriers get squeezed out of business.
Because truck driving holds little appeal at any price to the younger people needed to replace those leaving the business, even the promise of much higher wages is unlikely to make much of a dent in the shortage, Larkin said. Instead, merger and acquisition activity are likely to increase, as companies look to buy their way into an existing driver workforce rather than prospect for labor from scratch, he said.
The situation is not much different in the less-than-truckload (LTL) sector, which is benefitting from continued strength in manufacturing and more rational pricing to push through rate increases with more frequency. During the same panel discussion, Ken Hoexter, transport analyst for Bank of America/Merrill Lynch, said that 2014 would mark only the third year in the past 20 that most LTL carriers have instituted two rate hikes in the same year.
One pressure point that may be lessening is equipment availability. Earlier this month, consultancy FTR said that North American heavy-duty truck "net orders"—the number of new orders minus order cancellations—hit 45,795 units in October, the second-highest month of orders ever recorded. While many of those rigs will replace older equipment, it is hard to believe that some fleets aren't now adding trucks for growth rather than just for replacement.
Added incentives to buy now, according to Larkin, include the soaring resale value of used trucks with three to four years of road time and the superior fuel efficiency of the newer engines, which can get as much as nine miles per gallon.
PROBLEM PREVALENT ACROSS ALL MODES
Like trucking providers, ocean carriers are also seeking to raise rates on any trade lane they can, but they are being thwarted by ship overcapacity as well as weak demand from struggling European economies on the world's largest lane, Asia-to-Europe. Still, worsening congestion at U.S. West Coast ports and concerns over labor unrest, as the International Longshore and Warehouse Union (ILWU) dicker with ship management over a new contract, have led trans-Pacific carriers to impose "congestion surcharges" on the eastbound trades of up to $1,000 per forty-foot equivalent unit (FEU) for cargoes scheduled to be unloaded on or after Nov. 17. The charge, roughly equivalent to the benchmark rate for moving a FEU container eastbound, is being assessed on boxes still on the water, a scenario that few people can recall occurring.
The congestion problems are forcing shippers to switch some of their seagoing shipments to air freight. That, in turn, is driving up air demand and rates, which is compelling large freight forwarders like UTi Worldwide and Ceva Logistics to arrange for massive air charters just to get goods to market.
It's hard to imagine that many ocean shippers feeling they are getting better service for their money. A survey by marine consultancy SeaIntel found that schedule reliability among the top 20 global carriers dropped to 71.3 percent in the third quarter from 75.5 percent in the second quarter. Severe congestion at major hub ports in North Europe, the United States, and Asia was cited as the main reason for the decline.
The railroads, meanwhile, are poised to reprice their contract rates by 5 to 7 percent in 2015 in response to mid- to upper-single digit increases in demand, even as they continue to struggle with subpar service metrics. At a shipper panel session on Tuesday, one of the panelists asked a roomful of about 80 brethren if they used railroads to move their goods. Virtually every hand was raised. The panelist then asked how many were satisfied with their current level of rail service. Not one hand went up.
Service levels have been dropping since before last winter due to the terrible winter weather, rising demand, a shortage of locomotives and crews, and persistent congestion at the national chokepoint in Chicago. However, Jason Long, transport analyst at investment firm Stephens Inc., said industry executives have told him that service could improve as early as the spring. Long thinks that projection is ambitious, especially if large parts of the country get hit with similar weather this winter.
Operators are doing what they can to, in transport nomenclature, "increase fluidity" in their systems. Western railroad BNSF Railway said yesterday it plans to make a record $6 billion in capital expenditures in 2015, coming off a record $5.5 billion in capital expenditures this year. It is expected that other railroads will follow suit, resulting in another all-time industry record for capital expenditures next year. The improvements are badly needed. Long said he was told by executives at Union Pacific Corp., BNSF's archrival in the west, that a one-mile-per-hour increase in train velocity effectively frees up 250 locomotives for utilization.
EFFECT ON GROWTH
The good news is the continued strength of U.S. manufacturing and the remarkably swift and sudden downturn in oil prices. The drop in oil prices should result in a decrease in carrier fuel surcharges, which in turn may encourage shippers to "trade up" for faster and premium air services—at least after the holiday rush—without getting hammered with onerous charges. The positive manufacturing story is likely to continue, driven by better productivity and efficiency, according to William Strauss, senior economist and economic adviser at the Federal Reserve Bank of Chicago. The decline in oil prices is just "the cherry on the top" of an already solid trend, Strauss said on yesterday's panel.
However, the tight capacity situation, which is due in part to better demand from an improving economy, could end up curtailing economic activity. Larkin said gross domestic product growth could slow if shippers and their third-party partners find it difficult to get the rigs and drivers they need to haul their product.